Solar Stocks: Wait Out the Tariff Wars

by Aaron Levitt | May 22, 2012 6:30 am

Solar Stocks: Wait Out the Tariff Wars

The solar sector can’t seem to catch a break these days. Everything from an abundance of oil and natural gas flooding storage facilities in the U.S.[1] to recent policy moves in the European Union have conspired against the renewable-energy sector — and photovoltaics makers in particular. It seems that every breakthrough is followed by a huge step backward.

One of the biggest has been unfair business practices in China. U.S. regulators have accused Chinese solar manufacturers, including China Sunergy (NASDAQ:CSUN[2]), of selling their panels and wafers below cost, which they can do because of generous subsidies from Beijing. According to the complaint, these artificially low prices are pushing American manufacturers out of the industry.

This below-cost pricing has caused photovoltaic-module prices to plunge more than 75% over the past three years and has claimed a variety of victims. Solyndra, which filed for bankruptcy in August despite receiving $535 million in federal loan guarantees, was said to be a direct casualty of illegal Chinese dumping.

The complaint was filed by the U.S. subsidiary of Germany’s SolarWorld (PINK:SRWRY[3]) and six other U.S. companies. Back in November, the U.S. Commerce Department said it would investigate. That inquiry has finally come to a head, with the U.S. imposing a series of tariffs on imported Chinese photovoltaic modules[4] averaging 30% — more than what analysts and China had expected.

The import tax applies to the bulk of exporters, including Suntech Power (NYSE:STP[5]) and Trina Solar (NYSE:TSL[6]). Overall, 59 Chinese solar producers will be affected by that 30% duty. However, some manufacturers could see fees as high as 250% because the U.S. ruling is retroactive and designed to cover imports dating back 90 days. Two months ago, Washington set tariffs of less than 5% on solar imports from China.

Beijing wasn’t thrilled[7], citing the lack of fairness in the latest tariffs. Already, analysts have speculated that Chinese companies could circumvent the restrictions by buying cells and wafers for panels from Taiwan and assembling them outside of mainland China.

The group that filed the complaint heralded the Commerce Department’s move. SolarWorld U.S. President Gordon Brinser said, “Commerce today put importers and purchasers on notice about the consequences of importing illegally subsidized and dumped products from China.” SolarWorld had asked for levies of more than 100% on Chinese producers.

But Canadian Solar (NASDAQ:CSIQ[8]) Chairman and CEO Shawn Qu[9] said the move “is unwarranted and will inflict losses on the entire solar industry. Limiting trade in solar products will cause panel prices to increase, defeating America’s goal of driving down costs and hindering its move toward a clean energy future.”

This echoes similar statements by Maryland-based Sun Edison founder Jigar Shah, president of the Coalition for Affordable Solar Energy, who said the tariffs ultimately will be paid for by the “paychecks of American solar workers.”

The critics could be right: Efforts to increase fairness in the solar market could do more harm than good.

Why? Import fees will raise prices for solar panels and components in order for China-based manufacturers to turn a profit. That’s likely to lead to price increases for modules in the U.S., which will dampen demand and installation growth. One of the major reasons why utility-scale solar installations have taken off is because of the panel-price plunge.

A decrease in demand could set off a chain reaction across the entire U.S. solar value chain.

High tariffs will slow demand for the polysilicon that’s used to make solar panels. U.S. companies reported nearly $2.6 billion in polysilicon exports in 2011. That includes about $700 million worth to China. Already, analysts speculate that Beijing could target U.S. exporters[10] of the critical raw material with their own series of duties. That would directly affect companies such as Electronic Materials (NYSE:WFR[11]), the largest publicly traded U.S. maker of polysilicon.

Likewise, sales of U.S.-produced solar inverters could take a hit. These devices are necessary to convert the direct current (DC) generated by solar panels into grid-usable alternating current (AC). U.S. companies produced about 45% of all the inverters installed in the U.S. in 2010.

Then there are the various home-solar and energy-efficiency businesses that have sprung up across the country. These mom-and-pop operations require cheap panels to succeed.

The other thing that doesn’t make much sense is that some of the companies targeted by the tariffs have factories and operations in the U.S. that employ U.S. citizens.

The duties will ultimately push back renewable energy’s place in the nation’s overall energy mix — and stoke a potential trade war with our biggest trading partner.

Where does that leave investors in the sector? With former industry leaders, such as Q-Cells, filing for bankruptcy and others, such as First Solar (NASDAQ:FSLR[12]) announcing huge restructuring plans[13], the near-term outlook isn’t good, especially when you add the new headache from the tariff scheme.

Perhaps the best strategy is to just walk away for now. Solar is a long-term — perhaps decades-long — bet on rising energy prices and dwindling traditional hydrocarbon supplies. The sector will be there after this tariff mess blows over. So, investors will have a chance to bet on the winners of this multi-year shakeout. Those companies will be stronger and better-equipped.

For really bold investors who want to add the sector today, the only way to do solar is via broad-sector plays such as theGuggenheim Solar ETF (NYSE:TAN[14]) or Market Vectors Solar Energy ETF (NYSE:KWT[15]).

I think the leave-it-alone-and-wait strategy will bear more fruit, however.